Has Brent Crude risen too fast, too soon?

31 марта 2016, 15:09

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We are seeing some renewed weakness hitting the oil markets and it really raises the question have we come too fast too soon?

You can argue that fundamentals at this stage are probably not there yet to support a sustained rally in oil markets. We have obviously been rallying on the back of news about a production freeze, we are seeing a meeting late in April where OPEC and non-OPEC members have to make a decision.

If they fail to do that, it could have a significant impact on the price. In the US, at the same time we will continue to see inventories rise over the coming weeks, there will be a slowdown and we will revert to an inventory draw as we move into May, but we are still a few weeks away from that.

These are some of the negatives at the moment, but probably the biggest worry right now is the fact that we are seeing speculative interest increase dramatically on the long side during the past six weeks.

If we look at Brent Crude on the chart here we can see the net long has now reached a record. For every short position on the market there is now almost 10 long positions. On previous occasions when we have seen markets become too skewed in one direction we often tend to see a sharp snapback the other direction, and that is the risk oil markets are currently facing.

Having broken back below $40 there is a risk in the near term that we will have to test lower. $35 is the first key level that comes into mind there and below that we are also looking at $33, but in the near term there is a risk that we can see Brent Crude drift back down towards the $35 area and then later, in Q2, establish the $35-$40 range.